The ACT’s own spin on Microcredit

Lighthouse Business Innovation Centre (Lighthouse) in partnership with the ACT Government launched the ACT Microcredit Loan Program in 2011. Originally an initiative aimed at improving the opportunities for women in the ACT, the program was expanded to support all low income earners in 2014 with Westpac joining the partnership. To date over 60 loans have been granted and around 45% of the businesses established are still operating. Other recipients have repaid their loans and re-entered full time employment. Eighty percent of loans have been granted to woman and to date there has been a default rate of less than 4%. This impressive record is starting to gain the attention of other organisations around Australia.

Microcredit grants small loans to low income individuals who are generally excluded from the traditional banking system. Microcredit is part of a larger microfinance industry that also provides other basic financial services to low income earners, including insurance and savings services.

Microcredit is by no means a new concept. It has existed in various forms for centuries, and many believe extends back several thousand years in some parts of Asia.

When most people think of Microcredit, they think of the Grameen Bank and the man considered to be the father of modern micro lending - Mohammad Yunus. In the mid 1970’s, Bangladesh was affected by a famine and drought. Dr Yunus, a Professor of economics was frustrated by the inability of economics to explain why so many poor people were starving. So he did what all good entrepreneurs do; he went out and visited local villages to understand what was going on. In one village he found a group of around 40 women who made bamboo stools. Because these women did not have the funds to buy the raw materials, they were caught in a cycle of debt with local traders. The woman borrowed the funds to buy the raw material on the basis that they would sell the stools at a price only marginally higher than the raw materials.

Dr Yunus was shocked when he realised that the total amount the woman needed to borrow to end this cycle was $27. He personally lent them the money at zero interest and this enabled the woman to sell their stools at a reasonable price and break the cycle (and repay the loan). This was the beginning of the Grameen project (which means Village Bank) which now has over 6 million low income earning borrowers worldwide.

Given that roughly 70% of people living under one dollar a day are women, almost 90% of Grameen bank loans are granted to women. Female recipients of these loans have shown that they are more likely to reinvest funds for the betterment of the entire family and are considered to be more reliable borrowers. While Grameen bank loans are no longer interest free (most loans attract 20 percent interest), the repayment rate is still around 98% of all loans issued.

The ACT Microcredit Loan Program differs from most other loan programs of this type because it offers two loans for businesses at different stages of development. Up to $3,000 interest free is available to entrepreneurs just starting out and up to $10,000 at a flat 3 percent interest rate is available to businesses that are already operating. Eligibility relates to income, the viability of the business idea and how prepared recipients are to work with mentors. There is an emerging trend in the innovation discussion lately, that says access to support, advice and help making sales is far more important than funding. This is the feedback we received from the majority of the loan recipients.

The ACT Microcredit Loan Program is currently restricted to businesses registered in the ACT, but the concept is gaining a lot of interest from other areas in Australia. Over the past 5 years Lighthouse has developed a robust structure and program delivery mechanism for the program that has seen it recognised as best practise by the Federation of Ethnic Communities’ Councils of Australia (FECCA).

“The businesses we have seen through the program have been from a broad range of sectors, but the key issues we see are similar - What is the best structure, how do I fund employees and expansion, how do I position and market my business and how do I deal with understanding and managing the risks?” says Anna Pino, CEO of Lighthouse.

“What surprises me most is that none of them ever mention a fear of failure. Most applicants see this as an opportunity to change their circumstances and give themselves an opportunity to make a difference to their lives and in many cases that of their families. Failure isn’t an issue – they have already done the hard yards.”

“Success of a program can be measured in many ways. The number of inquiries, applications and loans granted say a lot about the success of this program.”

“But to us success is also measured by the mix of applicants and ideas we see. We are seeing an increasing number of older entrepreneurs (male and female) who want to make a difference and give back. We are also seeing an increasing number of younger entrepreneurs who want to be in charge of their own future. We also see success in those that choose not to continue with their business, but have developed their self-confidence and determination to the point that they can reengage with the workforce at a much more senior level than they would have attempted before. It’s not always about the money and it’s definitely about the people rather than the idea.”

2016 brings us a new collection of applicants and ideas locally and the opportunity to work with those outside of the ACT. We look forward to the program’s growth and continued success.